Bumpy Ride Ahead for Bankers

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After years of operating in a favorable political environment, student loan companies woke up November 8 knowing that changes in Washington would probably mean trouble for their industry, which has enjoyed a close working relationship with Congressional Republicans (thanks, in part, to their sizable campaign contributions to key GOP lawmakers).

While a collection of lending company executives said changes are certainly in store, the panel played down the anxiety factor and said student loan officials need to be prepared to sell the new Washington leadership on the merits of their industry.

“I don’t think nervousness is the right word,” said Shelley Saunders, vice president of strategic services for American Student Assistance, a lender. “Debate is good, and we shouldn’t be afraid or get sucked into the usual rhetoric."

Added Sara Davis, executive director of government and industry relations for Nelnet: "We’ve learned a lot of lessons since 1993 (the year that President Clinton threw his weight behind the government's direct lending program, which competes with the guaranteed loans the banks offer) and need to show that discussions about what's best for the student aren't a problem for us."

Companies like Nelnet and American Student Assistance are unlikely to find a friend in Sen. Edward M. Kennedy (D-Mass.), who is slated to become chairman of the Senate committee that oversees education programs. Kennedy has been an outspoken critic of what he and other Democrats say are subsidies and perks in the Federal Family Education Loan program -- and especially in the so-called alternative or private loan industry -- that favor lenders but do not help students.

The Democrats are promising that one of their first acts come January will be to cut interest rates on federal student loans in half -- from 6.8 percent to 3.4 percent for many loans -- and to raise the maximum Pell Grant by more than $1,000. Davis said the interest rate cuts are likely to pass through Congress and, if widely supported, would unlikely be met by a presidential veto.

“There’s a heavy symbolic importance for Democrats, and it’s going to happen in the first 100 days because it has political cachet," Davis said.

Kennedy has said he plans to reintroduce legislation that would provide incentives to colleges that switch to the direct lending program. He is also proposing to cap a borrower's college loan payments to no more than 15 percent of a family's income.

The U.S. House of Representatives leadership plans to take up similar legislation, the Student Aid Reward (STAR) Act, introduced last year by Rep. Tom Petri (R-Wisc.) and Rep. George Miller (D-Calif.), incoming chairman of the House Education and the Workforce Committee. The bill aims to increase spending on Pell Grants and reduce the deficit, in part by giving colleges incentives to switch with no added taxpayer cost. Kennedy has said that the STAR Act would promote competition between the FFEL program and the direct loan program and would encourage colleges to pick the less expensive choice.

Davis said she opposes the act because “the premise is based on fictional accounting rules.”

Still, Tim Morrison, vice president of federal government relations for Sallie Mae, said the STAR Act is likely to get support in Congress.

Another Kennedy-backed proposal is the Student Loan Sunshine Act, which would require institutions to report to the Department of Education benefits their officials receive from a lender. Deals reached between colleges and lenders have made headlines this fall, and some Democrats have called for a look into the enticement practices.

Davis, the Nelnet executive, said there's no harm in having a discussion about benefits, but added that lenders have to be wary of too much federal government regulation.

Saunders said there's already a good amount of self-policing in the industry, but there's room for more -- such as a promise from lenders and colleges to post any deals they negotiate. "If we become more transparent, we won’t need government involvement," she said.

Kathleen Smith, president of the Education Finance Council, which represents dozens of state and regional nonprofit loan agencies, said that "once you get down to the ‘You can have coffee but not wine,' you dilute the discussion," she said. "That doesn’t give financial aid officers any credit for their professionalism.”

Panelists agreed that it's unrealistic to believe that all of the Democratic proposals will come to fruition. Morrison, the Sallie Mae vice president, said “the more ambitious the reform efforts, the less likely they are to get done.” Saunders added that "the reality is going to hit members on both sides of the aisle: You can’t do all of these programs because the money isn’t there.”

Michael Dannenberg, director of the Education Policy Program at the nonpartisan New American Foundation, said in his blog that while he sees conflicting messages coming from the two political parties, there is hope for a plan that cuts interest rates and increases affordability. (Dannenberg was once senior education counsel to Kennedy.)

"Certainly leadership of the new Congressional majority has rhetorically attacked excess taxpayer subsidies to student loan providers and inadequate aid to students and families," Dannenberg said in an interview. "Lenders would be making a mistake by reflexively assuming a siege mentality, though. The goal of reducing student loan interest rates can be done in a way that the lending community could support, but (the lenders) have to be constructively engaged."